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Legal Briefing

Corporate and commercial | 01 December 2010

As 2009 draws to a close, the dust is now settling on what has been a very busy few years for UK company law. The Companies Act 2006 (the 2006 Act) represented the biggest overhaul and update of UK company law for decades, since its predecessor, the 1985 Act, was really only a consolidation of the existing laws. The 2006 Act took over three years from royal assent to final implementation, with the final parts of the 2006 Act coming into force in October 2009, when most of the remaining provisions of the 1985 Act were repealed. Given that the 2006 Act was proposed by the Department of Trade & Industry, initially implemented by the Department of Business Enterprise and Regulatory Reform, and finally implemented by the Department of Business Innovation & Skills, it is not surprising that it has been amended already, particularly to take account of changes to EU law such as the Shareholder Rights Directive.

The 2006 Act has sought to simplify the regulation of private companies, but to get the benefit of much of this simplification, private companies must take positive steps to implement the new provisions. Since the 2006 Act covers all UK companies, whether public or private, big or small, it remains to be seen to what extent the simplification of the regime will benefit UK business generally.

Company Constitutions

Memorandum

A company’s memorandum is now a document of purely historical interest, only containing statements that the first subscribers wish to form the company and that each of them agrees to take at least one share.

Companies incorporated before 1 October 2009 will have additional statements and provisions in their memoranda that are now deemed to form part of their articles of association. However, because companies are no longer required to have an objects clause and the concept of authorised share capital has been abolished, these provisions will need to be removed (either by specific resolution or by the adoption of new articles). Unless removed, an objects clause will continue to restrict a company’s capacity and a statement of authorised share capital will now act as a restriction on a company’s ability to allot shares.

Articles

The model articles have replaced Table A as the default articles for companies. There are now three sets of model articles, covering private companies limited by shares, private companies limited by guarantee and public companies. The intention of these new model articles is to simplify and deregulate corporate procedure (see box on p16). It is expected that most new companies will use the model articles as a template and tailor them to the specific needs of the company. It should hopefully become the norm for companies to have all applicable provisions set out in full in one document, rather than the current norm of switching between Table A and the articles. The most common amendments to the model articles are likely to be provisions for alternate directors, removal of directors and conflicts of interest.

Share capital

While the abolition of authorised share capital goes some way to removing the need to take steps to check and possibly enlarge share capital in advance of a share issue, several other changes have also simplified the governance of a company’s share capital, including:

Directors of private companies with a single class of share can allot shares without shareholder authority (unless specifically prohibited from doing so). This power only applies to existing companies if approved by ordinary resolution of the members.

The power to allot shares remains subject to statutory pre-emption rights (unless otherwise disapplied) and to other pre-emption rights that may be relevant.

A private company, without specific authorisation in its articles, is now able to redeem shares and purchase its own shares out of capital (unless specifically prohibited from doing so).

A company no longer needs to have authority in its articles to reduce its share capital, and share capital reduction is now possible without the need to go to court – provided the directors can sign a solvency statement.

Any returns or submissions to Companies House relating to share capital now require a statement of capital to be completed. However, this new requirement is not as easy to comply with as it might look. At the time of writing, there is no official guidance on how to complete the statement of capital, and conflicting advice has been received on more than one occasion.

Directors’ duties

The 2006 Act has codified and attempted to clarify the duties of directors. A director is now under a positive duty to avoid a situation in which they have or may have a direct or indirect interest that conflicts or may possibly conflict with the interests of the company. The duty to avoid such a conflict or potential conflict arising has been the biggest change, and companies are choosing to deal with it in different ways. Subject to the 2006 Act, conflicts can be authorised by a company’s articles or by the board of directors, although methods of authorisation differ between private and public companies, and also depend on when the company was incorporated.

In addition to avoiding conflicts, the 2006 Act sets out and codifies several other directors’ duties, including duties to:

act in accordance with the company’s constitution and exercise powers for their proper purpose;

exercise reasonable care, skill and diligence;

promote the success of the company for the benefit of its members as a whole;

exercise independent judgement;

not accept benefits from third parties; and

declare the nature and extent of any interest in a proposed transaction or arrangement with the company.

Company administration

While the recession has squeezed the budgets of in-house lawyers, inevitably relegating non-essential legal spend to the back of the line, to get the full benefit of the 2006 Act, in-house lawyers should decide how and to what extent the 2006 Act affects the day-to-day management and administration of their company and work with the directors to streamline where possible and take advantage of what the 2006 Act has to offer, in addition to ensuring compliance with the new regime. The main considerations and points of note are:

Consider amendments to articles, including whether to adopt the new model articles.

Private companies should consider whether to delete an express requirement to hold an AGM.

Consider whether any transitional resolutions are needed to take advantage of relaxations in the 2006 Act, which can be passed at the same time as adopting new articles (for example, on directors’ conflicts, alternate directors or allotment of shares).

Particularly for group companies, ensure that they comply with the requirements for directors, including that there is at least one natural person who is a director.

Ensure that the board of directors is educated on the statutory statement of directors’ duties.

Ensure that any procedures for authorising conflicts are up-to-date and fit the needs of the company or group.

Where it is decided to dispense with a company secretary, determine who is responsible for maintaining company records and statutory returns. A group could have a group company secretary covering every company in the group, or have one per company. In any event, it is likely that an in-house lawyer may be the best person for the job, even if not in the guise of company secretary.

Ensure that company meetings and resolutions comply with the 2006 Act – particularly the written resolution regime, which is now heavily prescribed under the 2006 Act.

Train and educate all relevant personnel on the changes to share capital provisions, and prepare a standard form of a statement of capital that will be accepted by Companies House.

Ensure that the company’s statutory details are included on all hard copy documents, e-mails and company websites. International groups should review each website individually to decide which group company the website is attributable to and ensure all relevant statutory details are included for UK companies as appropriate.

Review all registers and record requirements, and ensure that registers comply with the 2006 Act. In most cases there are relaxations to be benefited from, but there are also some new requirements, including a requirement to keep a separate register of directors’ residential addresses.

In terms of service addresses for directors, they may wish to take advantage of stating an alternative address to their residential one.

Consider where to keep the register of members and other statutory books of the company and make any necessary notifications to Companies House of any registers held at an alternative location to the registered office. Companies that already kept their books in a different location prior to 1 October 2009 now have an obligation to notify Companies House of that fact.

Review internal and group signing procedures, along with any standard documents to ensure that, if appropriate, they permit a single director to execute deeds, in front of a witness.

Familiarise all relevant personnel with the new Companies House forms and procedures.

Some companies decided to make amendments as and when parts of the 2006 Act were implemented and others have waited until now before making any changes. For the majority of public companies, the AGM season is now upon us, so the time is right to consider how best to benefit from and fully comply with the 2006 Act now that it is entirely implemented. Many private companies who have not taken advantage of the AGM dispensation will similarly be keen to ensure compliance and optimum efficiency.

Whatever your own company’s situation, now is the right time to ensure that your house is in order.

The new model articles are the default articles for all new companies from 1 October 2009 and they have several advantages over the previous Table A regime, including:

Language: the model articles are drafted using clearer language and follow the language of the 2006 Act.

Relaxation: companies using the new model articles will be able to take full advantage of the relaxations available under the 2006 Act.

Brevity: the model articles are much shorter than their predecessor, Table A.

Compliance: the model articles are fully compliant with the provisions of the 2006 Act. In addition, the Table A regime will quickly become out-of-date and could be troublesome for companies operating under it.

Validity: being endorsed by statute, it is unlikely that the model articles will be questioned by the courts.

To get the benefits of the new model articles, existing companies will need to specifically adopt them. There is no automatic or deemed change.